The housing market in San Antonio for 2016 is shaping up to be a strong seller’s market which means fierce competition between buyers. In order to win in a multiple offer situation, and that is more likely than not this year, you have to lead with your strongest offer because you many only get one shot. Many agents only work with buyers or sellers but I work with both and the benefit to working both sides of the market is that I see what kinds of offers are being made and I see common mistakes made repeatedly. I advise sellers on how to work through evaluating multiple offers and I see what factors get weighed in their decision making. To help you better understand the mechanics of a strong offer I have laid out my analysis of the different aspects of an offer that collectively determine it’s strength.
Your Lender Letter – If you don’t have a solid letter from your lender you are not even at the table for the discussion in a multiple offer situation. The seller has multiple buyers and they aren’t going to take a risk on buyer who hasn’t been serious enough to get prepared. Not all lender letters are equal either, see my article Why getting Pre-Approved for a Home Loan Matters. A weak lender letter is an auto-generated letter from an online lender where you filled out information about your income and credit and they didn’t verify anything. A strong lender letter is signed by the loan officer and states that they have reviewed your income, assets and credit in writing and you are pre-approved. As a listing agent I call the lender on every single offer and ask them what they have reviewed, but you can’t count on all listing agents to do that so it’s best to have it in the letter.
The Type Of Loan You Choose – Theoretically this should not matter to the seller but the reality is that it matters a great deal because the type of loan you choose may indicate your financial strength as a buyer or it may increase transaction risks for the seller. For example, an FHA loan typically has a lower down payment requirement and lower credit score requirements than a Conventional loan, which means that the FHA buyer may not be as strong and there may be a higher risk of an FHA loan not closing. VA loans are complex and may require the seller to pay some of the buyer’s closing costs as a condition of the loan. Additionally, the VA has their own appraisers who inspect the home to a higher degree than other appraisers and who are more likely to call for repairs that must be made prior to closing. In my experience, all other terms being the same, the order of preference for a seller is : cash, 20% down conventional, 10% down conventional, 5% down conventional, FHA, USDA, VA, Texas Vet. I’m not saying it should be this way, I’m tell you how it is.
The Price – This one is probably obvious but I’m surprised at how many times a buyer offers below asking price and is surprised that they don’t get the house. If it’s a good house, priced well, new on the market and well located the question is not “will they get asking price?” but instead “how much above asking price will they get?” In my experience the offers that are accepted are typically 2% to 6% above asking price. There is a risk when you offer above asking price that the property will not appraise for the contract price and I have seen buyers who include in their offer that they are willing to pay cash for the difference if it does not appraise. That is aggressive and hard for other offers to compete with.
Contingencies For The Sale Of Your Home – In the past you could put a contract on a new home that was contingent on the sale of your old home. If you old home sold then you closed on the new home, if it didn’t sell you were off the hook for the new home. A contingency in a multiple offer situation is almost certainly a deal killer, it severely weakens your offer. Why would the seller accept a contingent offer which may not close when they have other offers on the table right now?
Closing Costs – Both the buyer and the seller have closing costs, and it used to be the case that buyers could ask sellers to pay some of their closing costs. With a few exceptions (such as properties that have been listed for a while with no offers) asking for closing costs in a multiple offer situation seriously weakens your offer. If a property is listed at $150,000 and you offer $150,000 but ask for $5,000 of your closing costs to be paid by the seller, you have effectively offered $145,000. Some buyers try and add to the price and offer $155,000 and ask for $5,000 in seller paid closing costs for an effective offer of $150,000. This strategy can work, but is also a weaker offer because it increases the risk that the property will not appraise for the contract price. An offer of $150,000 asking for $0 seller paid closing costs is stronger that either of the other two offers. Instead of asking the seller to pay your closing costs I have seen buyers offering to pay some of the closing costs that are traditionally paid by the seller such as the survey and the title policy. This is another aggressive strategy and one that I have seen work well, but be aware that this will increase the amount cash that you will have to bring to closing.
Nice To Have Items – This is what I call the category of contract terms that include things like the Home Warranty, the Survey Deletion Endorsement to the Title Policy, asking for Appliances and long closing dates. These are all items that benefit buyers but weaken your offer in a multiple offer situation. In the end that are all just costs that can be shifted to one side or the other. I think all buyers should have a Home Warranty, they may just have to buy it themselves.
Offering A Leaseback – Sellers are sitting in the catbird seat now, but after they sell that are going to be buyers just like you. They may not be able to line up their new home purchase as easily as they have in the past and they may not know where they are going to move. To solve this problem, many sellers ask to lease the house back from the buyer for a month or two. Almost all loans will allow the buyer to lease the home back to the seller as long as the buyer moves in within 60 days from closing. This allows the seller to close, get their sale proceeds, and avoid having to make offers on a new home that are contingent on the sale of their home (see above).
A Letter To The Seller – This was not common practice two years ago in San Antonio but is becoming more and more common today. The seller knows very little about you as a buyer, about your family and about why you chose their home. When comparing multiple offers, the amount of money the sellers gets may not be their only motivating factor. It may be that they raised their family in the home and the fact that you have two small children is important to them. It may be that the seller is a Veteran and the fact that you served in the Armed Forces as well makes them select your offer above the others. It may be that you write a beautiful letter to the seller and it doesn’t sway them at all. Writing a letter doesn’t cost you anything and it can be powerful with the right seller.
Responsiveness – Believe it or not I have seen buyers lose a deal because their offer was the one selected but they didn’t respond quickly and the seller moved on. With offers waiting in the wings, you don’t want to give the seller any reason to think that you may have changed your mind or are getting cold feet. Respond quickly, respond clearly.
All of these factors, taken together, make up the strength of your offer. Offering a higher price is usually not enough, you have to be smart and craft your offer so that is as appealing to the seller as you can make it. The good news is that after having read this you are well on your way to being able to win your next multiple offer!